Remember the International Monetary Fund? The Washington-based multilateral lender bestrode the globe in the crisis-prone 1980s and ‘90s, umpiring debtor nations’ fates. A comeback attempt in Argentina late last decade flopped. Argentines threw out their president and restructured the national debt despite $45 billion in IMF funding.
Now the fund is leaning into global recovery from Covid-19, sort of. The executive board approved a $650 billion capital increase July 9, theoretically multiplying the IMF’s firepower more than threefold.
IMF clients could use the help. Standard & Poor’s has downgraded the credit ratings of 45 emerging-markets countries since the pandemic started, says Samuel Tilleray, an S&P Global sovereign credit analyst. But there is a lot less to the increase than meets the eye.
IMF credit lines, known as Special Drawing Rights, are held by each member proportionally to its contribution. They are not transferable. That means low-income countries, as defined by the IMF, can immediately access just $25 billion of that $650 billion. The 44 nations S&P ranks B+ or lower—credit-challenged, you might say—get $42 billion, Tilleray calculates.
“Most countries’ allocations are too small, or their challenges so substantial, that a one-off cash injection doesn’t make much difference,” concludes Jan Friederich, head of Middle East and Africa sovereign ratings at competing agency Fitch Ratings.
Investors are taking some heart anyway. Emerging markets as a whole will get some $230 billion in financial cushion from the IMF’s upsizing, observes Shamaila Khan, director of emerging markets debt at Alliance Bernstein.
That should impress markets even if most of the big economies—Mexico, Indonesia, Russia—won’t need it.
For some more fragile entities, the relative scraps from the IMF table could bolster their outlook. Ricardo Adrogue, head of global sovereign debt at Barings, likes the prospects of Angola, Jordan and Tunisia, all of them on the B+-or-worse list.
“The IMF allocation could be a shot in the arm for these credits, which are yielding near double digits in dollars,” he says. Khan adds El Salvador and Argentina itself as favored debtor nations.
The IMF has nurtured some quiet successes since the Argentina debacle, adds Marcelo Assalin, head of emerging markets debt at William Blair. The “poster child” is Egypt, where the fund has poured in $5.4 billion since 2018. That’s enabled Cairo to raise nearly $9 billion on private markets since the pandemic hit.
The IMF may engage further in pandemic recovery now that ex-president Donald Trump’s opposition to multilateralism is no longer an obstacle, investors hope.
The U.S. and other rich members are already “pushing and hauling” toward a mechanism to transfer SDRs to needier countries, says Edwin Truman, a former assistant treasury secretary now at Harvard’s Kennedy School.
That could lift bond markets going into next year, Shamaila Khan predicts. “I’m not sure it’s a 2021 event, but we’re watching it as the next positive catalyst,” she says.
Nothing the IMF does is as important for emerging-market debt right now as two other factors: the spread of Covid’s Delta variant and U.S. bond yields, as driven by perceptions of inflation.
If those factors pan out benignly, though, the fund could lend a tailwind. “We are already exposed to higher-yielding emerging markets, but very cautiously so,” William Blair’s Assalin says.